UBS: Big Fine, Little Impact

"I need you to keep it as low as possible. If you do that, whatever you want. I'm a man of my word." So said one trader at UBS (NYS: UBS) to a colleague at another brokerage house in his attempt to manipulate the London interbank offered rate, or Libor: the fundamental interest rate that so many of the world's financial products use as their own benchmark interest rate.

Blaring hypocrisy duly noted, the $1.5 billion fine American, Swiss, and British authorities are doling out because of such behavior will have little effect on the Swiss banking giant. And in a year that we've seen fine after fine levied against the world's biggest banks, many of which stem from bad behavior somehow related to the financial crisis, it's worth asking what the point of such fines are: whether they're having any real effect, or are just becoming another operating expense?

Another day, another giant fineA hefty $1.2 billion will go to the U.S. Department of Justice and the Commodity Futures Trading Commission, and $212 million will be paid to the Financial Services Authority, a record amount for the U.K. regulatory agency. Switzerland's regulatory authority, Finma, will receive $64 million. UBS's Japanese subsidiary actually pled guilty to wire fraud, which hasn't happened to any bank in more than 10 years.

If you recall, the Libor rate-rigging scandal burst into the news in June of this year, when Barclays (NYS: BCS) agreed to pay $450 million to U.S. and U.K. authorities on charges its traders had tried to manipulate Libor to boost profits. The scandal even brought down Barclays larger-than-life CEO Robert Diamond, who resigned his position because of it.

The year of living expensively Just last week HSBC (NYS: HBC) agreed to pay $1.92 billion to the Justice Department to settle charges that it laundered money for Mexican drug cartels and Middle East terrorist financiers. Standard Chartered, another British banking giant, also coughed up $327 million to the Justice Department for violating sanctions and doing business with Iran, this on top of the $340 million it already paid in August to New York State's Department of Financial Services for the same transgressions.

I've lost track of all the American banks sued by prosecutors this year, but two immediately come to mind: the Manhattan district attorney's suit against Bank of America (NYS: BAC) for alleged mortgage-lending abuses dating back to the pre-crash era, announced at the end of October , and a suit by the same office against JPMorgan Chase (NYS: JPM) for alleged mortgage fraud perpetrated by its Bear Stearns unit, also announced in October.

I have a dreamSo where does this leave the banks? UBS has more than $916 billion in cash on its balance sheet. Yes, in relative terms, $1.9 billion is a big fine, but it will hardly hinder the Swiss banking giant's ability to do business. Barclays has $1.3 trillion in cash on hand. What's $450 million up against that? JPMorgan was unarguably hurt worse by its own London Whale trading incident, which has cost the bank at least $5.8 billion this year, than by any lawsuits. Behemoth B of A is hardly going to be taken down by regulatory fines, either. What, then, is the point of all this?

Good question. Regulators and prosecutors need to do something to justify their existence, to show the public that misdeeds are being punished. But, of course, you don't want the punishment to go too far. You don't want to fine the banks big enough amounts to actually cause them to collapse, as that would just cause worse mayhem.

At this point, these fines could be viewed more and more as simply operating expenses for the banks, the cost of doing business. Is there an alternative? Iceland famously tried and convicted ex-Prime Minister Geir H. Haarde, who was in office at the time of the financial crash , and two days ago announced that Larus Welding, CEO of one of Iceland's biggest banks, is being indicted over crisis-related behavior. That won't happen here, but it's fun to dream.

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